Current issues in Australian takeovers
July 2021 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
July 2021 Issue
The Australian M&A market, like many others, is very active. This article covers the state of the market along with some topical deal structures and recent changes to Australia’s foreign investment regime.
State of the market
2020 proved to be a year of two halves. The first half was dominated by coronavirus (COVID-19), which, with some exceptions, generally saw ongoing deals continue to complete, leveraging technology to navigate the new environment. However, some transactions were paused, and new deal flow slowed.
Successful management of the pandemic in Australia contributed to a revitalised market in the second half of 2020. This involved earlier transactions restarting and new deals seeking to capitalise on opportunities emerging in a post-pandemic world. Demand was primarily driven by corporates, super funds and, in particular, private equity. Foreign purchasers also looked to Australia as a sound market in which to invest. These players had the necessary dry powder and deal appetite to look beyond the crisis, either to engage with impacted industries, such as Bain Capital’s acquisition of Virgin Australia Airlines or BGH’s bid for Village Roadshow, or invest in the future, such as Capgemini’s acquisition of RXP Services.
A key moment was the announcement in late 2020 of the $11.1bn acquisition of Coca-Cola Amatil by Coca-Cola European Partners. This large cross-border deal demonstrated confidence in the ongoing Australian outlook and was the point at which the market unlocked.
Strong momentum from the second half of 2020 then continued into 2021 and this period is likely to be looked back on as the start of an M&A boom. Significant transactions that have come to market in 2021 include the approaches to Tabcorp, the proposed acquisition of BINGO Industries by Macquarie Infrastructure and Real Assets and its managed funds (MIRA) and Seven Group Holdings Limited’s off-market takeover offer for Boral Limited.
The pipeline for the remainder of 2021 appears full and we expect high levels of M&A activity to continue.
Deal structures
The Australian M&A market has adapted to the various issues arising from the current environment, including by focusing on deal structures to address those issues. There are two particular structures worth noting.
First, given the uncertainties generated by the pandemic, a number of deals looked to contingent consideration to bridge the value gap between what a bidder was prepared to pay and what a target would accept, particularly if the outlook improved. In the BGH-Village Roadshow deal, BGH offered shareholders base cash consideration for each share, but also a range of uplifts contingent on the reopening of theme parks, cinemas and the Queensland state border. This enabled the target to see upside if events material to its profitability occurred.
Another deal structure that has been useful in the past year has been stub equity. This involves offering target shareholders participation in the bid vehicle to retain upside to the underlying business. Limits will be placed on the minimum and maximum participation and there will need to be scale-back mechanisms to deal with oversubscriptions. The BGH-Village Roadshow deal had a stub option, as did the proposed $2.5bn acquisition by MIRA of BINGO Industries. The latter deal also included an earn-out feature with the stub equity option.
While there has been some regulatory interest from the Australian Securities and Investments Commission in stub equity structures, the position is now relatively well settled, and stub equity is a useful and uncontroversial feature of the Australian M&A market.
Contests for control
Another perhaps unsurprising feature of the Australian M&A market has been a number of vigorous contests for control of listed companies. While the Australian takeover regime provides bidders with some deal security, it is always possible for rivals to enter the fray.
Vitalharvest Freehold Trust owns one of the largest aggregations of berry and citrus farms in Australia. The responsible entity of the Vitalharvest Freehold Trust entered into an implementation deed with Macquarie Agricultural Funds Management (MAFM) in November 2020, whereby MAFM would acquire all of the units in Vitalharvest for $1.00 per unit. In late February 2021, Vitalharvest received a competing proposal from Roc Private Equity at $1.08 per unit. Cutting to late-May, at the time of writing, and after the eighth MAFM proposal and eighth Roc proposal, Roc was in the lead at $1.29 per unit.
The Mainstream Group, a provider of fund administration services, is another example of a contested situation in the current market. Here, Mainstream entered into an implementation deed in March 2021 with Vistra, whereby Vistra would acquire Mainstream for $1.20 per share. Two new bidders entered the mix, with the result that at the time of writing, SS&C was in the lead at a price of $2.66 per share, more than double the original recommended offer.
Foreign investment reforms
On 1 January 2021, revisions to the Australian foreign investment regime came into force. Those revisions include a number of significant reforms, such as an additional trigger for Foreign Investment Review Board (FIRB) approval, enhanced powers of the treasurer and increased criminal and civil penalties.
The new regime now has an additional requirement for a foreign person to seek FIRB approval before taking a ‘notifiable national security action’. Even where an action is not a ‘notifiable action’ or a ‘significant action’ under the previous tests, approval will be required to start or take a direct interest in a ‘national security business’. Such a business is one involved or connected with ‘critical infrastructure assets’ (such as electricity, gas, water and ports), telecommunications or defence (among others). Approval is also required for acquiring an interest in ‘national security land’. In each case a nil monetary threshold applies, meaning approval is required regardless of transaction value, unlike a notifiable action or significant action.
The treasurer’s powers have also been enhanced to include a ‘call in’ power and a ‘last resort’ power. The call-in power allows the treasurer to review and make orders in relation to certain actions not previously notified to FIRB, regardless of their value, where they may pose a national security concern. This power can be exercised up to 10 years after an action has occurred.
The last resort power allows the treasurer to make divestment orders and unilaterally impose or vary conditions in relation to actions already approved by FIRB. Subject to certain other conditions this power is enlivened by a false or misleading statement of the applicant directly related to a national security risk, a national security risk that could not have been foreseen at the time of the original application arising due to a material change in business, structure or organisation of the applicant, or a national security risk being altered by a material change in the market. This is a significant departure from the previous regime, under which the treasurer was bound by FIRB approval unless the applicant breached a condition of approval or would not be disadvantaged by, or agreed to, a variation.
The treasurer’s powers are complemented by new compliance and enforcement tools and substantially increased criminal and civil penalties.
While the Australian foreign investment framework remains facilitative toward investment, these changes reflect the increased focus on the ownership of key infrastructure assets.
Tony Damian is a partner and Raul Vellani is a solicitor at Herbert Smith Freehills. Mr Damian can be contacted on +61 (2) 9225 5784 or by email: tony.damian@hsf.com. Mr Vellani can be contacted on +61 (2) 9225 5032 or by email: raul.vellani@hsf.com.
© Financier Worldwide
BY
Tony Damian and Raul Vellani
Herbert Smith Freehills
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